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Xi faces unpalatable choices on trade, politics and Hong Kong

Hard approach would temporarily bolster Beijing's authority but risk long term costs

| China
By accepting Trump's deal, Xi will lose face but reap real, albeit limited, gains.   © Reuters

These are tough times for Chinese President Xi Jinping.

Although he managed to talk American President Donald Trump into resuming stalled Sino-American trade negotiations at the G-20 summit in Osaka, Japan at the end of June, huge gaps need to be closed and the prospect of a deal remains uncertain. In the meantime, the escalating protest against a controversial extradition law in Hong Kong is also testing his crisis management ability.

In both cases, China's political calendar demands a quick resolution. October 1 this year is the 70th anniversary of the founding the People's Republic. Xi obviously would like to showcase the country's achievements under his leadership in the last seven years. The failure to end the Sino-American trade war or defuse the Hong Kong crisis will not only dampen the festivities, but also raise fresh doubts about his leadership.

Besides October 1, another critical political event looms on the horizon. The Central Committee of the Chinese Communist Party (CCP) has not convened a plenum since February 2018. By the party's convention, a plenum (the fourth of the current Central Committee) must be held before the year end. Should Xi fail to clinch a deal with Trump or quell the unrest in Hong Kong without violence, these two issues could be uncomfortable conversation topics at this gathering of more than 300 senior party officials.

Unfortunately for Xi, ending the trade war and putting out the fire in Hong Kong present unpalatable choices.

In the case of the trade war, he has one last shot because the Sino-American trade talks have already broken down twice before (in May 2018 and May 2019) and, should this round end in failure, it would be even more difficult to close a deal because the American presidential campaign will heat up soon and limit Trump's ability to make compromises. But meeting Washington's stringent demands, such as maintaining the punitive tariffs even after an agreement is reached and codifying one-sided enforcement measures, would risk criticisms of accepting an "unequal treaty."

Further complicating Xi's calculus is the realization, now sinking in among top Chinese leaders, that the value of a trade deal with the U.S. has greatly diminished because Trump's tariffs have already done enormous long-term damage to China's manufacturing sector. Most business leaders see that sourcing from China for the U.S. market subjects them to Washington's whims and anti-China sentiments. The only way to mitigate this risk is to move some, or all, of their supply chain out of China. Additionally, the U.S.-China tech war, another front in the unfolding cold war between the titans, is unlikely to cease even if Beijing and Washington strike a trade deal.

Against these costs Xi must weigh limited upside benefits. In the short-term, ending the trade war will demonstrate his leadership, get rid of an unpleasant conversation topic, and restore his image as a strongman capable of making difficult decisions. He can also refocus on his top priority: delivering a credible report card to the party in the coming three years to ensure his third term. There are short-term geopolitical benefits as well. A trade deal, even with diminished long-term value, can help cushion the free-fall in Sino-American relations. If such a deal delivers sufficient benefits to U.S. business, Beijing may win back some of their support and make the U.S.-China economic decoupling -- a prized strategic objective of Washington's hawks -- more difficult to achieve.

However, Xi can obtain these benefits only by taking personal responsibility for accepting Trump's deal, however humiliating the terms may be. He will lose face but reap real, albeit limited, gains

The mass protest in Hong Kong presents Xi with the same dilemma.

Beijing is clearly facing the most serious political crisis since taking over the former British colony in 1997. A protest movement focused on an extradition bill has now mushroomed into a frontal challenge to the CCP's authority and crossed the red line laid down in Xi's 2017 speech marking the 20th anniversary of the return of Hong Kong to Chinese rule. He said, "Any attempt to endanger China's sovereignty and security, challenge the power of the central government and the authority of the Basic Law of the Hong Kong Special Administrative Region or use Hong Kong to carry out infiltration and sabotage activities against the mainland is an act that crosses the red line, and is absolutely impermissible."

Hong Kong's anti-riot police will unlikely be able, or even willing, to apply the brutal measures.   © Reuters

But crushing the mass protest with violence may probably require using the Chinese garrison troops since Hong Kong's anti-riot police will unlikely be able -- or even willing -- to apply the brutal measures needed to reassert control. A Tiananmen-style crackdown in Hong Kong would definitely spell the end of "One country, two systems." Besides making the city ungovernable, Beijing would trigger tough international sanctions, including the revocation of America's Hong Kong Policy Act that treats the city as a separate entity from China. A crackdown would also likely doom the Sino-American trade negotiations.

China's political calendar similarly gets in the way for Xi. Continuing unrest in Hong Kong would mar the festivities of the 70th anniversary of the People's Republic of China, but a violent crackdown could be even worse (in 1989, the PRC's 40th anniversary was barely celebrated because of the Tiananmen crackdown). Xi will also need to consider the impact of a crackdown in Hong Kong on Taiwan, which will hold presidential and legislative elections in January. Violently suppressing Hong Kong's protests would all but ensure the reelection of President Tsai Ing-wen of the pro-independence Democratic Progressive Party.

That leaves compromise as a less costly alternative. Xi will need to accede to the protesters' demands: the withdrawal of the extradition bill and the resignation of the city's chief executive, Carrie Lam. Such concessions are politically difficult because they will not only expose Xi to criticisms of showing weakness but also deliver a clear victory to Hong Kong's pro-democracy forces.

If Xi wants to play the long game, it is obvious that he should make concessions in both cases. But if he feels that compromise will irreparably damage his authority, then he must stick to his hard line positions despite potentially catastrophic long-term consequences.

While moderates in the party would like Xi not only to make the necessary compromises to get over the twin crises but also start retreating from policies that have contributed to the deterioration of U.S.-China relations, they are unlikely to have the strongman's ear. Power has been so concentrated under Xi that only a few loyalists now have access to him. Since such people are afraid to offer advice that implies Xi's fallibility or damages his authority, their safest bet is to tailor their recommendations to the options they believe he prefers.

So far it is hard to tell which direction Xi is leaning. But one thing is sure: he doesn't have much time.

Minxin Pei, a professor of government at Claremont McKenna College and the author of China's Crony Capitalism, is the inaugural Library of Congress Chair in U.S.-China Relations.

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